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You can’t outrun sales tax – Wacky Tax Wednesday

Last weekend was the start of the summer tourist season. More than 39 million Americans were expected to travel over Memorial Day Weekend: 2.9 million by plane, and another 1.75 million by boat, bus, or train. I was one of them, having ventured by ferry to Victoria, B.C. But because most travelers still prefer the independence offered by a vehicle, more than 88 percent of Memorial Day Weekend travelers tucked themselves behind a steering wheel and hit the road. That trend is likely to continue throughout the summer, as those who dislike heat try to escape it, and heat-lovers seek it out.

For some people, the best way to travel is to bring along the comforts of home in an RV, or a “house on wheels,” as my son likes to call them. Sales of recreational vehicles dipped during the Great Recession, but they’ve been on the rise for years. More than 9 million U.S. households now own an RV, and that number is expected to increase as more baby boomers retire.

While it’s possible to pay as little as $5,000 for a small folding camping trailer, larger and more luxurious RVs range from $60,000 to $500,000, plus sales or use tax and registration fees. All but five states in America have a general sales and use tax, with state rates ranging from 4 percent to 7.25 percent and combined state and local sales tax rates topping out above 10 percent.

Human nature being what it is, it’s perhaps not surprising that some people try to sidestep sales tax on such big-ticket purchases. And it turns out that there’s an entire state willing to accommodate this practice.

Sidestepping sales tax

The easiest way to avoid paying sales tax on a pricey RV is to buy and register it in one of the states that doesn’t have a general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, most states don’t register the vehicles of just anyone who comes along; registrants usually must be residents. One glaring exception to that rule is Montana.

Thanks to a loophole, out-of-state residents can easily set up a Montana LLC and have the in-state company purchase and register a motor vehicle in Montana, instead of the out-of-state individual. It isn’t even necessary to travel to Montana to do so. This explains the large number of RVs nationwide with Montana plates — word spreads quickly among RV owners.

States are wise to motor vehicle sales tax evasion

Although the practice is perfectly legal in Montana, it isn’t appreciated in other states, especially those that depend on sales and use tax revenue and vehicle registration fees. When the Los Angeles Times broke the news in 2006 that Montana has a thriving cottage industry devoted to helping out-of-staters set up shell-corporations for the sole purpose of avoiding paying sales tax, states started working to close that loophole on their end. California, Iowa, Massachusetts, Minnesota, Nebraska, and Wyoming are among the states that have already done so, most commonly by enforcing sales or use tax collections on any vehicle bought in another state and brought into their state within a certain period of time. Lawmakers in other states, including New York, are still working to enact legislation to prevent residents from registering their vehicles in other states.

Several states, including Colorado and Washington, now encourage residents to report any known violations via tip lines. State troopers also keep their eyes peeled for state-registered vehicles “pulling camper trailers with Montana plates.” Minnesota goes even further; taxpayers found guilty of evading sales tax by registering their vehicles in other states could be imprisoned for up to five years.

Still, the battle is ongoing. Although the Montana DMV requires owners to show proof of sales tax payment on vehicles previously registered in another state, the state hasn’t cracked down on the shell corporations because, as Secretary of State Corey Stapleton has said, “Per Montana (law), the business purpose for an LLC is not required for registration with the office.” While some officials in the state do insist that vehicle registrants have “an interest in real property” in Montana, the requirements are so minimal that an attorney’s office address could qualify.

Oregon, however, has taken steps to stymie a similar practice. The Oregon DMV website now clearly states that only actual residents can register their vehicles and/or get an Oregon license or ID card. And the draw of purchasing or registering pricey motor vehicles in Oregon could soon disappear: The state is considering implementing “a new sales tax on motor vehicle purchases.”

Revenue lost to motor vehicle sales tax evasion

States are willing to go to great lengths to secure sales and use tax revenue on RVs and other expensive vehicles purchased in other states because they depend on that revenue to fund education, transportation, and a variety of social services. Every million counts, and there are millions to be had.

Between 2010 and 2015, the Minnesota Department of Revenue collected more than $1.1 million in taxes, penalties, and interest from more than 80 taxpayers found defrauding the state by avoiding the taxes they owed on their recreational vehicles. Iowa collected approximately $600,000 during a three-month settlement period after passing a law outlawing residents from registering their vehicles to out-of-state corporations.

Tips to California’s CHEATERS (Californians Help Eliminate All The Evasive Registration Scofflaws) program brought in $3.2 million over a two-year period. The California Highway Patrol estimates that the state is “losing $10 million a year in revenue from drivers who fail to properly register their vehicles.”

The moral

If you live in a state with a sales tax, it’s against the law to avoid paying sales or use tax on taxable goods that will be consumed, used, or stored in your home state. And yes, that generally includes RVs that will spend much of their time on the road and parked in campgrounds in other states.

Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.